Legal Review: FTC Sues Payment Processors for the Misdeeds of Their Merchants

Vendors and service providers: beware! If you provide services to a client that the Federal Trade Commission (FTC) believes is engaged in deceptive telemarketing activities, you could be a target of an enforcement action. That is the clear message emanating from recent lawsuits filed by the FTC against two merchant processing firms that provided services to companies that allegedly conducted deceptive telemarketing campaigns offering debt relief services to consumers.

These recent actions stem from lawsuits originally filed by the FTC in late 2012 and early 2013 against two companies — Treasure Your Success and Innovative Wealth Builders — for allegedly engaging in those deceptive outbound campaigns. Treasure Your Success was also charged with violations of the “Do Not Call” provisions of the Telemarketing Sales Rule (TSR).

Now the FTC has amended its complaints to include the payment processors for these merchants, along with the former president of one of the processors, as defendants. The FTC’s complaints allege that the merchant processors are liable for the misdeeds of their clients because they either knew or should have known based on consumer complaints and high chargeback rates that their clients were conducting deceptive campaigns.

These latest actions are part of a growing trend at the FTC to expand the net of potential liability. The legal basis for the FTC’s actions in these cases is the “assisting and facilitating” provision of the TSR. Under this provision, the FTC has broad authority to bring actions not only against marketers who engage in deceptive or abusive telemarketing practices but also against any other companies or individuals who provide “substantial assistance” to those marketers if such companies or individuals either “knew or should have known” that the marketer was engaged in unlawful conduct.

In these particular cases, the FTC has alleged that the processing companies assisted and facilitated the underlying merchants by providing these marketers with access to the merchant processing system. The FTC also believes the merchant processors either knew or consciously avoided knowing that their clients were engaged in unlawful conduct because the companies allegedly had a high level of consumer complaints and high chargeback rates.

There are several aspects of these cases that should concern not only processors but also any third-party vendor that is part of the telemarketing ecosystem.

First, the “knew or should have known” standard has historically been interpreted quite broadly by the FTC. As a practical matter, in most cases where there is a history of high consumer complaints and/or high chargeback rates, the FTC will simply assume that the service provider “knew or should have known” that the campaign was deceptive. And while in this case, the merchant processors were obviously in a position to know the underlying chargeback rates, the FTC has applied this standard to other categories of vendors.

Indeed, the duty to affirmatively monitor one’s clients is a clear theme emanating not only from this case but also from other cases. There is no question that the FTC expects vendors and service providers to conduct due diligence on their clients and to make an independent determination as to the legality of the program.

Perhaps of greatest concern is the potential financial risk to merchant processors and other vendors that these cases signal. Under the FTC’s theory of liability, these merchant processors could be held liable not only for the actual fees earned for services rendered but for the full amount of alleged consumer injury as well as additional statutory penalties. Processors should also beware that in cases where the FTC has sought to freeze the assets of the underlying merchant, the FTC has also sought to include reserve accounts as part of the frozen assets.

In light of these other similar cases, merchant processors, ISOs and other vendors that provide assistance or services to companies engaged in telemarketing campaigns can no longer bury their heads in the sand. The FTC expects, at a minimum, that vendors review their clients’ telemarketing scripts, and affirmatively track levels of consumer complaints and chargeback rates.

In the past, many vendors have been reluctant to take these actions out of fear that such monitoring might actually increase the risk of liability. Such an approach may no longer be viable. While vendors may still look to shift the burden for legal compliance on the marketer through contractual warranties and indemnities, those provisions will not carry the day with the FTC. ■